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Tuesday, September 27, 2016

As noted earlier, the post-debate market relief rally has given way to concerns over banking woes, with stocks turning lower in Europe as focus returns to Deutsche Bank and Italy’s constitutional referendum, now scheduled for December 4. More troubling is the overnight news that two German issuers - Nord LB and Lufthansa - followed quickly by Korean Air Lines, have pulled their bond deals prompting commentators to suggest that 'uncertainty on the credit front appears to be weighing" on some and may be raising concerns about the German economy.

As IFR reported overnight, concerns around potential contagion from the German banking sector forced Norddeutsche Landesbank to shelve a 7 year senior unserued bond on Tuesday "after the issuer struggled to find enough demand to cover the seven-year trade." The German lender, rated Baa1/NR/A-, started marketing the benchmark trade on Monday at 90bp area over mid-swaps via leads BNP Paribas, DZ Bank, NordLB, Santander (B&D) and UniCredit. However, Nord LB's ambitions were cut short as renewed concerns around Deutsche Bank's capital position swirled around the market, sending spreads wider.

"It didn't get the response that you would want. There is too much noise around the German banking sector," a lead manager said. Deutsche Bank's bonds shot wider despite the bank insisting it can weather a potential U$14Bn fine without raising extra capital and that it had not sought a government bailout. A 750m 4.5% 2026 Tier 2 bond has widened 24bp since Monday's open to swaps plus 509bp.

But Deutsche Bank is not the only culprit. The German Landesbank sector, of which NordLB is a part, has also come under intense scrutiny this year given the damaging scale of its shipping loan exposures. Reuters reported earlier this month that the German state-controlled lender had agreed to take full control of its loss-making Bremer Landesbank unit, which is suffering from a weak shipping market that is chipping away at its capital.